Difference between Wall St. Banks (AIG) and local banks

By Sen.Doug Whitsett (R-Distr. 28)
One of the many repercussions of our current economic crisis
has been a lack of credit for the private sector, further slowing the
growth of economy. It is important, however, to isolate and understand
the source of this solvency problem. In today’s deluge of news headlines
on the financial crisis, the discussion of the financial institutions
involved in the turmoil has failed to distinguish between the
institutions that caused the mess that we are in and the institutions
that can help us solve it.

News reports that have blamed "banks" for the
credit crunch that we are experiencing are misleading; there is a very
big difference between the institutions that are at the root of the
problem-such as AIG, Bear Stearns, Merrill Lynch, and Lehman Brothers,
which are not banks-and traditional banks that are FDIC-insured as
depository institutions. Wall Street and Main Street banking are very
different, and the failure to distinguish between the two undermines
confidence of the traditional banking industry. It should be remembered
that it is the weakness of Wall Street banking, the non-bank lenders and
securitization markets that is driving the stories about the lack of
credit.

Traditional depository institutions, such as the community
banks that we have here in Oregon, make small business and personal
loans and should be considered a trusted repository for Oregonians’ hard
earned savings. Unlike the Wall Street financial institutions that are
dominating headlines, these banks are a part of their communities and
serve as the primary source of capital for local investments.

Oregon banks are and were subject to rigorous oversight by not only state, but
federal regulators as well, and very few made subprime mortgage loans.
Moreover, they employ approximately 20,000 Oregonians. Contrary to
current perceptions, the traditional community banking sector has
actually experienced an increase in lending during this recession.
According to the Federal Reserve, in the last year business loans
expanded by 11 percent, consumer loans expanded by 9 percent, and
overall business lending by banks expanded by 12 percent, indicating
that community banks can be a part of the solution to our financial
crisis if they are included. With this in mind, the policy
considerations affecting Oregon’s banks are crucial to the successful
restoration of our economy.

On Tuesday, two of Oregon’s House legislators proposed a
bill that would levy a 100 percent tax on executive bonuses paid by
Oregon banks that receive assistance from the U.S. Treasury’s Troubled
Asset Relief Program (TARP). The motivation for such a bill is the $165
million in executive bonuses that AIG has been paying out of federal
bailout money. A complement to this bill, which has not yet been
assigned a number, is HB 2784

<http://www.leg.state.or.us/09reg/measpdf/hb2700.dir/hb2784.intro.pdf> ,
which would create a state oversight board to review the activities of
institutions that receive federal money. These proposals are
inappropriate for our state and will result in very little increase in
revenue as only three Oregon-based banks received TARP money. Of those
three only two awarded bonuses which were relatively small and
predominantly in stock and non-equity incentive compensation.

The proposal of these bills illustrates the misperception and mismanaged
regulation of Oregon’s banking industry. It associates Oregon’s banking
industry with Wall Street institutions when our healthy community banks
practiced responsible fiscal policy by steering clear of the financial
instruments that led to the insolvency of institutions like AIG. That is
not to say, however, that the Federal government is misguided in its
consideration of a 90 percent tax on recipients of bonuses from AIG and
other such institutions.

The argument that bonuses and compensation for
management makes financial institutions more competitive is shallow and
does not address the root of the matter; the management decisions to
invest with complicated financial instruments, formulate subprime loans,
and engage in other highly leveraged financial activities are a
contributing factor to the economic turmoil we find ourselves in today.
In an attempt to promote policy appropriate for Oregon’s
investment in small business industry, my office has introduced SB 890
<http://www.leg.state.or.us/09reg/measpdf/sb0800.dir/sb0890.intro.pdf>
to establish a small loan guarantee program.

This
bill directs the Economic and Community Development Department to
develop a program that guarantees loans or other forms of credit to
small businesses for
operational capital. Our economy is being confronted with otherwise
stable small businesses that are struggling for capital, shedding jobs,
and consequently some are failing because credit for operation loans is
unavailable. This bill provides a solution in that it creates a
temporary state loan guarantee program to help free up bank held capital
for access by small businesses for short term operating loans. This
proposal is only one of many possible solutions to our economic
problems; others are needed to encourage the relationship between
Oregon’s small businesses and their community banks. Most importantly,
the first step towards any solution is for Oregonians to have confidence
and trust in their local banks. It is also critical for legislators here
in Salem to make informed and sound policy decisions that support the
ability of our banks to provide services that contribute to the creation
of jobs and the investment that will encourage the economic recovery of
our state.

Please remember, if you don’t stand up for rural Oregon, no
one will!
Missed a Newsletter? Find a list of all Senator Whitsett’s Newsletters and Press Releases on
his website <http://www.leg.state.or.us/whitsett/> .